Mumbai: Rupee slumped to two-week lows on Wednesday on worries foreigners may slash investments after the stock market regulator proposed curbs on the flow of foreign funds into shares, a key driver of the currency.
Late on Tuesday, the Sebi said that after consulting the government it was recommending changes in the policy on participatory note (PN) issuance, a route foreigners can use to buy shares and bonds.
"The situation is extremely fluid at the moment and the market will only stabilise only later in the day," said Ashit Parekh, head of FX trading at IndusInd Bank. At 0939 hrs, IST, the partially convertible rupee was at 39.88/89 per dollar, within sight of the 40 per dollar mark, down 1.4 percent from Tuesday's close of 39.345/39.360.
Last week, it had hit 39.27, its strongest level since March 1998. Stock markets plunged at Wednesday's open, triggering circuit breakers that shut the markets for one hour.
The 30-share benchmark BSE index was down 7.91 percent and the broader NSE index was down 9.25 percent. A surge of foreign buying had driven the benchmark index to 18 record highs in the 19 sessions to Tuesday, and had driven the rupee up 12.5 per cent against the dollar this year, complicating monetary policy and currency management.
A US rate cut last month brightened the outlook for emerging market assets, and the pace of inflows has picked up since then. Foreign portfolio inflows to Indian shares have jumped $4.6 billion this month, taking the total in 2007 to a net $17.6 billion -- well above the full-year record of $10.7 billion in 2005.
The central bank has bought nearly $40 billion in the first eight months of this year to absorb the huge inflows. "This was in the works," a strategist at a foreign bank said in Singapore.
"The central bank must have got tired of pressing the bid button on the dollar all the time." Authorities have also sold intervention bonds to absorb inflows, raised banks' reserve requirements, eased overseas investment limits for individuals and companies and even clamped down on offshore borrowing by local firms, but to little effect.
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